Controlled Composition Clauses: Myths Dispelled

Entertainment lawyer Wallace Collins wrote an article for Music Think Tank entitled "Beware of the Controlled Compositions Clause."

While I wholeheartedly agree with the premise of Mr. Collins' post (i.e., watch out for controlled composition clauses) and I appreciate that he couldn't cover all of the details extensively in a single post, the piece does not appear to have been fact checked and when I tried to comment on the Music Think Tank site, I received error messages and the site would not allow my comments to be posted.

In any case, as a royalty auditor who audits compliance with statutory mechanical royalty rates as well as controlled composition provisions, I feel compelled to point out the following regarding Mr. Collins' and Music Think Tank's post. Thus, I am posting my comments here on The Auditrix blog:

Example of language similar to that found in typical controlled composition clauses

First of all, in practice, statutory royalty rates are effectively *maximum* rates, not minimum rates, as Mr. Wallace and Music Think Tank state. (The term "minimum statutory rate" as used in controlled composition provisions references the fact that there is a minimum rate that applies to uses that are five minutes or less; higher rates apply for uses that exceed five minutes.) As much as I wish that my music publishing and composer clients were entitled to minimum rates that would be equivalent to a minimum wage, they are not.  The statutory rates are simply the reportable rates for compulsory licenses and since negotiated licenses virtually never exceed statutory rates, statutory rates are effectively a cap and not minimum rates at all.

Secondly, while I understand that it used to be a common practice of record companies to cross-collateralize mechanical and artist royalties, which is an issue that Mr. Wallace and Music Think Tank warn readers to beware of, I believe many labels were sued over this practice decades ago and I haven't seen it in my 14 years of royalty audits. In fact, modern artist agreements specifically prohibit this. (However, many contracts do allow for recoupment from artist royalties of "excess mechanicals" which are mechanical payments to publishers that exceed the cap set forth in applicable controlled composition provisions. Despite this, such provisions do not prevent the publisher from collecting royalties and, in practice, we do not see many excess mechanical charges against artist royalties in any case.)

Finally, the Digital Performance Right in Sound Recordings Act of 1995 prohibits record companies from applying controlled composition provisions for digital phonorecord exploitations (i.e., permanent downloads) in most but not all cases, which is a glaring omission from the piece, since it drastically reduces the the impact of most controlled composition clauses.  Due to this law (and the fact that streaming services are responsible for paying US publishing royalties for streaming exploitations) the exploitations that are potentially subject to controlled composition provisions are mainly US sales of physical CDs and vinyl, which are less than half of overall US sales. (Not to mention that US sales are equal to or less than foreign sales for most of my clients, and the controlled composition provisions are largely inapplicable outside the US.)

Also, to Mr. Collins' point that there is a question as to whether one writing partner can bind another is the fact that the Department of Justice is considering requiring publishers (or their agents) to engage in what is called 100% licensing, in which any rightsholder can issue a license for 100% of a song. Sony/ATV's Martin Bandier recently wrote a letter to songwriters about this issue (which relates to much more than controlled compositions) and The Association of Independent Music Publishers (AIMP) (of which I am the national treasurer) recently presented a program on the topic, a video of which members can view at AIMP.org (viewing this discussion is well worth the cost of membership, if you aren't already a member).

Of course, there are many more crucial details to understand about controlled composition provisions, especially as they relate to audiovisual content and premium uses, which is why many attorneys consult with us during the contract negotiation process. No one can be expected to know everything about the arcane world of royalties, so such negotiations are usually a team effort.

A Forensic Accountant Does Not a CPA or CFE Make

Beyond navigating all kinds of accounting and record keeping systems, a modern forensic accountant needs the ability to ascertain compliance with relevant regulations and/or contracts and, often, to process terabytes of information using sophisticated database software, plus the ability to communicate findings in a manner in which a layperson can comprehend.

It isn't easy to find an expert who possesses all of the above qualities and when you do, your counterparty will likely endeavor to bar the expert from auditing or testifying.

Some of the strategies to limit a party's top choice of forensic accountant include attempting to:

• Proactively limit contractually:
• Who can conduct an audit (e.g., requiring it be a CPA and/or nationally recognized firm, even though the "Big 4" accounting firms are not especially well regarded as royalty audit or forensic accounting experts and many are unwilling to take on such engagements)
• When an audit can be conducted by your auditor of choice (e.g., certain companies try to prevent the best auditors from conducting more than one audit at a time at any particular company)
• Reactively attempt to discredit your expert by attempting to equate the term "accountant" with "CPA" (although they are not the same) and frame your accounting expert's credentials solely in terms of CPA certification (or other certification or degree), even if the expert is opining on industry practice or damages calculations (and not a public-accounting-related matter, such as compliance with GAAP).

However, forensic accounting (including royalty auditing) is a private accounting service, not public accounting.  No official certification exists for "forensic accountants" or other forensic experts; neither CPA and/or CFE certifications, nor economics and/or statistics degrees validate that the bearer has the training or experience necessary to succeed in forensic accounting.  Although these and other degrees and certifications can have bearing on the suitability of an expert, depending on the particular case, a "forensic accountant" these qualifications do not alone make.

Modern forensic accounting is really a blend of:

• Accounting
• Eeconomics
• Industry expertise
• IT
• language arts
• Above-average understanding of certain legal concepts

While some CPAs, CFEs and economists have this, the vast majority do not, as I once observed when a highly degreed certified public accountant had a meltdown on the stand when he had to admit during questioning that he had no relevant expertise that pertained to the matter at hand.

Fortunately, the curriculum at the University of Southern California - where I studied under highly respected IP attorneys, accountants and economists - and my decades of work experience focus on all of the above areas, so I am a very well rounded forensic accountant, particularly in the entertainment and IP sectors, where I bring deep industry expertise.

My recommendations for finding the right auditor or forensic accountant for you or your client are to search for someone with a balance of industry expertise and relevant accounting and/or testimony experience.  Request the potential expert's CV, a list of cases in which they have testified and/or participated and client references.  If the potential expert forensic accountant doesn't ask a lot of questions and clear conflicts before learning details of the case, it is a red flag that he or she is inexperienced.

Finally, make sure you discuss your or your client's budget with the expert; a rate sheet alone won't tell you how many hours of work will be required on your case and if you think all you need the forensic accountant to do is spend an hour putting together a spreadsheet and signing a declaration that you drafted, you may be mistaken; although we often need to define the scope of an engagement to meet a budget, a forensic accountant's work is usually a bit more complex than meets the eye, so do not assume you know how much time a particular engagement may take.